Metals and mining stocks were falling sharply on Tuesday as a political stalemate in the US prompted a reduction in risk appetite.
Meanwhile, falling commodity prices and gloomy comments on gold from ratings agency Fitch were also weighing on sentiment.
The first partial government shutdown in 17 years came into effect today in the States after Democrats and Republicans continued to disagree over the budget for next year. As the start of the new fiscal year begins some 800,000 federal employees will be placed on unpaid leave and sent home as the US government is forced to shut down non-essential agencies.
President Barack Obama said a shutdown would throw a "wrench" into the recovery and have a "real impact on real people right away". Moody's believes that a three-to-four-week shutdown could shave as much as 1.4 percentage points off of US gross domestic product growth in the fourth quarter.
Without an agreed increase in the debt ceiling, investors are concerned that the US could reach its borrowing limit of $16.7tn by October 17th, by which time the government could run out of cash to fulfil its debt obligations.
Worries over the subsequent impact on economic growth were weighing heavily on metals prices today with gold futures
for December delivery down 2.4% at $1,294.80 an ounce on the COMEX, their lowest level in two months. Meanwhile, silver was down 3.8% and copper fell 1.8%.
Speaking to The Wall Street Journal, Senior Commodities Broker Bob Haberkorn from RJO Futures said that he thinks the 'safe-haven' investment right now is cash: "Gold is not acting like the safe-haven device that it historically has [...] Cash makes people feel comfortable."
Meanwhile, analysts at Fitch said in a statement today a suspected rebound in gold prices
is unlikely in the face of an anticipated unwinding of US quantitative easing and "unspectacular" economic growth. They said that a further decline in the yellow metal "remains a real possibility".
They said that their ratings of gold producers incorporate a base-case gold-price assumption of $1,200 per ounce for the next two years. A fall to $1,000 (under a 'stress scenario') "would put some gold miners' ratings under significant pressure without substantial cost cutting and cash conservation measures", they said.
Precious metals producers Fresnillo and Randgold were the two worst performing stocks on the FTSE 100 in afternoon trade on Tuesday with smaller peers Polymetal, African Barrick Gold and Centamin also falling heavily on the FTSE 250.
Anglo American, Glencore Xstrata, Hochschild Mining, EVRAZ, Kazakhmys and Ferrexpo were also falling sharply.
Top performing sectors so far today
Life Insurance 6,280.74 +1.27%
Fixed Line Telecommunications 3,951.04 +1.23%
Aerospace and Defence 5,187.32 +1.15%
Electronic & Electrical Equipment 4,049.43 +0.86%
Support Services 6,227.14 +0.83%
Bottom performing sectors so far today
Industrial Metals & Mining 1,448.80 -4.25%
Food Producers & Processors 6,576.29 -2.55%
Mining 16,116.70 -2.28%
Beverages 14,231.82 -1.78%
Tobacco 35,878.25 -1.71%